Uncertainty created by the debt ceiling debate is likely to exacerbate claims-cost inflation that has put upward pressure on property and casualty insurers’ loss ratios — and ultimately consumers’ premium rates, according to Triple-I’s chief economist.
“Whether we go to five, 10, 20 days or not – or if we don̵7;t have a shutdown at all – this signals to the market a dysfunction in terms of government activity,” said Dr. Michel Léonard, Triple-I chief economist and data scientist in an interview with Triple-I CEO Sean Kevelighan. “That leads to higher interest rates … which drives inflation and reduces growth.”
As material and labor costs rise, home and vehicle repairs become more expensive, pushing up insurance company losses and putting upward pressure on premiums. For a P/C industry already struggling with high replacement costs and trying to grow with the rest of the economy, Léonard said, “This [debt limit debate] contributes to these challenges.”
Kevelighan — whose background includes working at the U.S. Treasury Department during the George W. Bush administration — called high replacement costs a “new normal.”
“You have to look at replacement costs for years over three years, and they are high,” Kevelighan said. “Personal home owner replacement costs have gone up 55 percent. We’ve had personal car replacement costs go up 45 percent. And if inflation goes negative, we’re in an even worse place.”
Léonard pointed out that the federal government has shut down 21 times since 1976, with shutdowns lasting as long as 35 days or as little as a few hours. In the interview above, he explains how these have typically played out and what types of scenarios may lie ahead.
How Inflation Affects P/C Insurance Prices – And How It Doesn’t (Triple-I Issues Brief)
Commercial Lines Partially Offset Personal Insurance Losses in P/C 2022 Results (Triple-I Blog)